Methods and apparatus relating to the formulation and trading of investment contracts

ABSTRACT

Methods and apparatus relating to the formulation and trading of investment contracts are described. An ordering party inputs contract data relating to a phenomenon. The phenomenon has a range of future outcomes and a future time of maturity. The contract data includes a set of probabilities of occurrence for each outcome within the range, and a consideration due a counterparty at or after the time of matching. At least one counterparty inputs registering data that includes a set of probabilities of occurrence for each outcome in the range. A data processing means prices and matches a contract for the phenomenon from the contract data and registering data. Pricing the contract includes applying at least one template of entitlement as a function of outcome to each counterparty&#39;s set of probabilities to give one or more individual counter party prices that are each equal to the ordering party&#39;s consideration, and applying the ordering party set of probabilities to each template of entitlement to derive an implied entitlement valuation. Matching the contract includes determining which counterparty will provide the best entitlement on maturity by comparing each entitlement with the consideration, and matching the contract with the counterparty having a template of entitlement for the best comparison.

This application is a continuation of U.S. patent application Ser. No.09/000,264, filed May 15, 1998, now U.S. Pat. No. 6,157,918 which is a371 of PCT/AU96/00420 filed Jul. 5, 1996.

FIELD OF THE INVENTION

The present invention is directed to methods and apparatus relating tothe formulation and trading of investment contracts. In one particularnon-limiting form, the invention is directed to methods and apparatusthat allow parties to invest a defined sum by way of pricing andmatching a contract with one of a possible number of unidentifiedcounterparties to achieve the best return (or entitlement) on maturityof the contract for a specified consideration.

BACKGROUND OF THE INVENTION

Reference can be had to International Patent Applications No.PCT/AU93/00250 and PCT/AU95/00827 that describe methods and apparatusfor the formulation and trading of risk management contracts. Theseapplications describe ways in which individuals and enterprises canmanage risk of an economic nature with which they are faced in a mannerthat can be thought of as akin to hedging or lending. The presentinvention is concerned rather with the desire to invest availableresources in the expectation of receiving the best available return at afuture time.

The need of entities and individuals to make investments with the aim ofgaining future returns is universal and well known. In general,investors look for opportunities to earn the highest possible returnsfrom investments that fit within their individual risk profiles and withtheir other investment criteria, such as type and tradeability of asset,investment price, investment growth and income potential, investmenttiming and regulatory regime, and so on. While the differing needs ofinvestors lead them to a great diversity of investments, all investorsshare the common goal of seeking to limit the risk in any investment asmuch as possible.

One major disadvantage is the lack of direct control that investors haveover investment risk. For example, investors cannot directly limit therisk they assume when investing in products such as shares, or financialinstruments such as foreign exchange or interest rate products. Instead,investors are exposed at all times to the market prices of theseproducts and have no mechanisms for limiting their exposure either atthe time the investment is made or subsequently. When, therefore, thereis high volatility in these markets, investors may suffer devastatinglosses.

This disadvantage is serious in countries where pension retirement fundsare replacing government-funded pensions as a major source of incomesecurity for people in retirement. As is well known, the values of thesefunds vary unpredictably from month to month and year to year,reflecting volatility in the underlying shares, property and otherassets in the funds. Individual investors are exposed to all thesechanges in value and cannot place limits on their risk.

A second major disadvantage lies in the fact that investors do not havemechanisms for making contracts that are customised to meet the needs ofboth investor and counterparty. For example, bank term deposits are acommon form of personal investment. For individual investors, they havethe advantages of a fixed nominal return and low entry and exit fees.However, the terms of the investment are set only by the counterparty(i.e. the bank) and then offered to investors on a take-it-or-leave-itbasis. There is no scope for investors to negotiate, for a price, theterms of these investments to better suit their individual needs.

A third major disadvantage is that individual investors cannot affordthe fees that are involved with most investment products. For example,shares must be bought through brokers on stock exchanges, and their feeseffectively deter the great majority of investors from investingdirectly in share markets.

It is an objective of the present invention to overcome or at leastameliorate one or more disadvantages in the investment contracts andcontracting mechanisms that are now available to investors.

SUMMARY OF THE INVENTION

In one form, the invention discloses a data processing system to enablethe formulation of multi-party investment contracts, the systemcomprising:

input means by which an ordering party can input contract data relatingto at least one phenomenon, each said phenomenon having a range offuture outcomes and a future time of maturity, the contract dataincluding a set of probabilities of occurrence for each outcome in saidrange and a consideration due to a counterparty at or after the time ofmaturity, and further by which at least one counterparty can inputregistering data including a set of probabilities of occurrence for eachoutcome in said range; and

data processing means operable to price and match a contract for a saidphenomenon from said contract data and said registering data, thepricing including:

applying at least one template of entitlement as a function of outcometo each counterparty's set of probabilities to give one or moreindividual counterparty prices each equal to the ordering party'sconsideration; and

applying the ordering party set of probabilities to each said templateto derive an implied entitlement;

the matching including:

determining which counterparty will provide the best entitlement onmaturity by comparing each implied entitlement with the consideration;and

matching the contract with that counterparty having the template for thebest said comparison.

Preferably, in the pricing, application of a template results in themultiplication of each elemental entitlement with each probability andthe summing of the products. Further, a discount factor is applied tothe sum to give a present day price relative to the time of maturity.

In the matching, each template is applied to the ordering party set ofprobabilities, and a multiplication of the elemental entitlements witheach probability performed, and the products summed to give the impliedentitlement.

The said sum can have a discount rate applied to give a present dayvalue relative to the time of maturity. The ordering party discountrates can be different between different types of counterparties.

The contract data can further include a minimum expected entitlementagainst which the counterparty prices are compared for the purpose ofaccepting ones thereof for the matching.

The invention further discloses a method for the formulation ofmulti-party investment contracts, the method comprising the steps of:

inputting ordering party contract data relating to at least onephenomenon, each said phenomenon having a range of future outcomes and afuture time of maturity, the contract data including a set ofprobabilities of occurrence for each outcome in said range and aconsideration due to a counterparty at or after the time ofestablishment;

inputting counterparty registering data including a set of probabilitiesof occurrence for each outcome in said range; and

pricing and matching a contract for a said phenomenon from said contractdata and said registering data, said step of pricing, for eachcounterparty, including:

applying at least one template of entitlement as a function of outcometo the set of probabilities to give one or more individual counterpartyprices; and

applying the ordering party set of probabilities to each individualcounterparty template to derive an implied entitlement;

said step of matching including:

determining which counterparty will provide the best entitlement onmaturity by comparing the implied entitlements with the consideration;

and matching the contract with the counterparty having the template forthe best said comparison.

Embodiments of the invention can overcome the disadvantages in existinginvestment mechanisms and contracts. Firstly, it enables investors toplace specific limits on the risk that they were prepared to tolerate inthe investment before entering the investment contract. Second, itenables investors to construct and tailor their specific investmentrequirements into a contract that could then be offered tocounterparties in the market for matching purposes. Thirdly, it enablesinvestors to make contracts with counterparties without the high costsof intermediaries.

DESCRIPTION OF THE DRAWINGS

Embodiments of the invention now will be described with reference to theaccompanying drawings, in which:

FIG. 1 is a block diagram of a generic system embodying the invention;

FIG. 2a is a block diagram of an indicative hardware platform supportingthe system of FIG. 1;

FIG. 2b is an alternative hardware platform that does not rely on acentralised hub data processing unit;

FIG. 3 is a timeline showing the steps of Example I,

FIG. 4 is a timeline showing the steps of Example II;

FIG. 5 is a timeline showing the steps of Example III.

FIGS. 6 to 19B show charts associated with Example I;

FIGS. 20 to 27B show charts associated with Example II; and

FIGS. 28 to 32B show charts associated with Example III.

DESCRIPTION OF PREFERRED EMBODIMENTS AND BEST MODE OF PERFORMANCE

FIG. 1 shows a block diagram of the generic system 10 embodying theinvention. The various stakeholders or parties to the system 10 eachhave access to a centralised processing unit 20. The processing units 20can be constituted by one or more data processing apparatus, with eachone thereof providing access for any one or more of the variousstakeholders to applications software supported by the system 10, as allthe processing units are interconnected. Access to the one or more dataprocessing apparatus is controlled by a generic form of communicationsco-ordination and security processing unit 25.

FIG. 1 also indicates that there are a number of types of stakeholder,and a number of individual stakeholders within each stakeholder type.The basic types of stakeholder are described as: applications promoters11, product sponsors 12, product ordering parties 13, potential productcounterparties 14, counter-party guarantors 15, regulators 16,consideration/entitlement transfer (‘accounting’) entities 17, andmiscellaneous parties 18. The number of types of stakeholder representedin FIG. 1 is typically the largest that will be supported by the system10.

An embodiment of a computer system for the system 10 is shown in FIG.2a. The core of the system hardware is a collection of data processingunits. In the embodiment described, the processing unit 20 comprisesthree inter-linked data processors 93,97,104, such as the Sun 670 MPmanufactured by Sun Microsystems, Inc. of the USA. Each processing unit93,97,104 runs operational system software, such as Sun Microsystems OS4.1.2, as well as applications software. The processor configurationshown in FIG. 1 represents a large system designed to handle thetransactions of thousands of stakeholders, the input and output datagenerated by those stakeholders, and risk management contract pricing,matching and subsequent processing functions.

Each processing unit 93,97,104 has connection with it one or more massdata storage units 95,100,110 to store all data received fromstakeholders, and other data relating to all other software operationsgenerating or retrieving stored information. Suitable mass storage unitsare, for example, such as those commercially available from SunMicrosystems.

A number of communications controllers 80,84,87, forming thecommunications co-ordination and security processing unit 25, arecoupled with the processing unit 20. These controllers effectcommunications between the processing units 93,97,104 and the variousexternal hardware devices used by the stakeholders to communicate dataor instructions to or from the processing units. The communicationscontrollers are such as the Encore ANNEX II, the IBM AS/400 server orthe CISCO Systems AGS+.

A large range of communications hardware products are supported, andcollectively are referred to as the stakeholder input/output devices 70.One amongst many of the communication devices 70 are personal computers51 and associated printers 52, which have communications connection withthe communications controller 80 by means of a modem 50. There can alsobe an external host device 53, such as a mini or mainframe computer,again linked with the communications controller 80 by means of a modem54. In other forms, communications can be established simply by means ofa tone dialling telephone 56, which provides for the input ofinstructions or data by use of the tone dialling facility itself. In thealternative, a voice connection via an operator 75 can be effected by aconventional telephone 58. Both these external devices are shownconnected with the communications controller 84. A further possibilityis to have data transfer by means of a facsimile machine 65, in thiscase shown linked to the communications controller 87.

In all cases, users of the input devices are likely to be required tomake use of system access password generation and encryption devicessuch as the Racal RG 500 Watchword Generator 66,67,68,69, (for personaluse) and the Racal RG 1000, which is incorporated in a mainframecomputer 53. The corresponding decoding units for these devices areincorporated in the communications controllers 80,84,87.

The generic processing unit 20 also includes a large number of‘portable’ information recordal devices, such as printers, disc drives,and the like, which allow various forms of information to be printed orotherwise written to storage media to be transferable. This isparticularly appropriate where confirmatory documentation of matchedrisk contracts is required to be produced, either for safekeeping as ahard copy record, else to be forwarded to any one or more of thestakeholders that are a party to each individual matched contract.

The generic system 10 shown in FIG. 1 encompasses many variedconfigurations, relating not only to the number and types ofstakeholders, but also the ‘architectures’ realisable by the systemhardware and software in combination. In that sense the arrangementshown in FIG. 2a is to be considered only as broadly indicative of onetype of hardware configuration that may be required to put the systeminto effect.

For example, FIG. 2b shows an alternate configuration that does not relyupon a centralised (hub) data processing unit, rather the necessaryprocessing is performed locally at each stakeholder site 200 _(n) bymeans of distributed software.

EXAMPLE I

This embodiment relates to an investment contract and describes theformulation of a contract based on potential future movements in thevalue of the fictional PTSE 75 index of share prices. In summary, theexample shows how the system enables one party (such as an institutionalfund manager) seeking to gain from a significant decline in the value ofthe PTSE 75 index in the future, specifically a decline by June 1996,relative to the assumed current (January 1995) value of the index tomake a contract with another, as-yet-unknown, party, such as anotherfund manager seeking to gain from a significant increase in PTSE 75index value. The specific offering is one which provides a contractordering party with a yet-to-be-specified contingent entitlement to anAustralian dollar future payout from a yet-to-be-identified counterparty(i.e. at maturity of the contract) upon the ordering party's investmentof a specified consideration amount.

The future money entitlement is contingent on two factors. The first isthe value, at contract maturity date, of the value of the PTSE 75 index.The second is the ultimate “shape” of the contingent entitlementfunction template that is determined by the system based on ordering andregistering information provided respectively by the ordering party andpotential counterparties.

In this example, the relevant key stakeholders are an applicationpromoter (BLC Inc), various product sponsors (the relevant one for theexample being BLC Inc itself), various product ordering parties (therelevant one for the example being Abbotts & Taylor), various potentialcounterparties (the relevant ones for the example being Abrahamsons andCarpenters Inc), a counterparty guarantor (CNZ Banking Corporation) andan application regulator (the Pacific Central Bank).

The timeline depicting the steps in the contract from the first step,Application Specification, to the final step, Contract Settlement, isshown in FIG. 3. The pages designated FIGS. 6 to 11B contain detailedexplanatory charts supporting FIG. 3. These pages are to be readtogether with the following description.

Looking at the first step in the timeline, Application Specification, inconjunction with FIG. 6, we see that BLC Inc established a contract APP(Application ID 001) on 91.06.03.17.00.00 (that is, 5 pm on Jun. 3,1991) to deal with investment. The application involves a pricing andmatching objective function of: “maximise pre-tax expected return onconsideration investment”. As a system instruction this means: identifya counterparty (or counterparties) who have defined pricing and limitparameters which, when combined with the ordering party's specifiedconsideration, will yield an entitlement payout shape that maximises theordering party's pre-tax expected return on consideration investmentsubject to whatever match constraints the ordering party and/orcounterparty has specified. Application ID 001 supports a range ofproducts.

Looking at the second step in the timeline, Product Specification, inconjunction with FIG. 7, we see that BLC Inc was also product sponsor ofProduct 10061 at the same time (91.06.03.17.00.00). This product relatesto the market termed Stock Indices and to the sub-market termed PTSE 75.The maturity date for Product 10061 is 96.06.03.17.00.00.00. Theconsideration for a specific contract involving Product 10061 is in theform of commercial bank deposits denominated in Australian dollars. Theentitlement is also in the form of commercial bank deposits denominatedin Australian dollars, payable (if necessary) immediately after theProduct's specified maturity date/time.

Looking at the third step in the timeline, Potential CounterpartyProduct Pricing Specifications, one can find two entities, Abrahamsonsand Carpenters Inc, acting as potential counterparties for forthcomingprimary product orders dealing with Product 10061. At this point in thetimeline (95.01.01.17.00.00.00), 42 months after the specification ofProduct 10061, both Abrahamsons and Carpenters Inc havecurrently-specified parameters for pricing potentially forthcomingorders for the product.

Looking at the fourth step in the timeline, Primary Order Specification,in conjunction with FIG. 8, it can be seen that an ordering party,Abbotts & Taylor, is seeking a contract, from an offering party, inProduct 10061 at that time (95.01.01.17.37.06.00). FIG. 8 shows thespecific parameters that Abbotts & Taylor has defined for the contractit is seeking at this time, including a desired investment considerationamount of A$ 51,920. For this investment of A$ 51,920, Abbotts & Taylorhas specified a minimum present value expected return of A$ 54,000together with a preparedness to accept a worst case outcome of loss of28 percent of the investment, that is A$ 14,480.

Abbotts & Taylor has the opportunity to constrain the system'sdetermination of possible payout shapes. Note that these are twotemplates constituting a capped, downward sloping (45-degree) shape anda capped perpendicular (90-degree) shape. In the preferred embodiment,an ordering party will not specify particular shapes and thus thematching system would explore all possible entitlement payout shapes.

Looking at the fifth step in the timeline, Order Specification Pricingand Contract Specification Limits, in conjunction with FIGS. 9A and 9B,the potential counterparty No. 1 Abrahamsons, has provided registeringdata in the form of assessed probabilities of occurrence, a discountrate from the time of maturity to the present day, a flat commissionrate, and a maximum negative entitlement amount. Abrahamsons' pricingparameters indicate that their appropriate defined circumstances ID foran ordering party such as Abbotts & Taylor is 26, which implies acommission rate of 1.25 a discount rate of 10.00% pa, a particular setof component product prices (as shown) and a particular set of assessedprobabilities of occurrence (as shown). It can further be seen that thesystem 20 determines, for Abrahamsons, a feasible set of net contingententitlement amounts both Abrahamsons and Abbotts & Taylor would judgeworthwhile given their specified parameters (as will be described ingreater detail presently). This occurs at 95.01.01.17.38.02.00. The formof the calculation is included in FIGS. 9A and 9B and results in animplicit contract bid price of A$ 51,920, the same as Abbotts & Taylor'sdesired investment amount. which Abrahamsons' parameters calculate willyield them a desired base margin on the contract of A$ 4,580.

An ordering party and each potential counterparty could potentiallycontract with each other on the basis of multiple sets of contingententitlement payout amounts. For simplicity of explanation, Example Iassumes that only four feasible sets of contingent entitlement amountsare available to the system 20 as the basis of a potential contractbetween Abrahamsons and Abbots & Taylor. They are the following:

1. A capped, downward sloping (45-degree) potential entitlement payout,embodied by FIGS. 9A and 9B. Note that in this and subsequent charts thepotential entitlement payout is recognized by the potential counterpartyAbrahamsons as the (negative) mirror image of the (positive) entitlementpayout that the ordering party Abbott & Taylor would receive.

2. A second capped, downward sloping (45-degree) potential entitlementpayout embodied by FIGS. 10A and 10B.

3. A capped, perpendicular (90-degree) potential entitlement payoutembodied by FIGS. 11A and 11B.

4. A second capped perpendicular (90-degree) potential entitlementpayout embodied by FIGS. 12A and 12B.

In all four feasible sets, the minimum entitlement amount for Abbotts &Taylor (the ordering party) is A$ 37,440. This amount represents 72percent of Abbott & Taylor's investment, the amount it specified as theminimum entitlement it was prepared to accept for the contract. This wasspecified by Abbotts & Taylor in terms of an investment loss limit of 28percent (FIG. 8).

FIGS. 13A and 13B show in summary form all four feasible sets ofcontingent entitlement payouts to Abbotts & Taylor, from Abrahamsons'perspective. The system 20 produced these potential contracts betweenAbrahamsons and Abbotts & Taylor in the following manner. First, thesystem successively combines on a trial basis all possible combinationsof entitlement attributes, namely “height” and “depth” of entitlementamounts and contingent payout range of feasible product definitionvalues or “x-axis values”, to reach a counterparty bid price for eachcombination. Simultaneously, all combinations that do not produce a bidprice equivalent to the ordering party's specified investment amount (inthis case A$ 51,920) are rejected. These results can be reached byvarious sophisticated heuristic and operations research-based methods aswell as by the simple trial-and-error search process described here.

Still looking at the fifth step in the timeline, in conjunction withFIGS. 14A and 14B, it can be seen that Carpenters Inc's pricingparameters indicate that their appropriate defined circumstances ID foran ordering party such as Abbotts & Taylor is 17, which implies acommission rate of 1.30%, a discount rate of 9.80% pa, a particular setof component product prices (as shown) and a particular set of assessedprobabilities of occurrence (as shown). As before, the system determinesa feasible set of net contingent entitlement amounts both Carpenters Incand Abbotts & Taylor would judge worthwhile given their specifiedparameters. This occurs at 95.01.01.17.38.02.00, (note that thesecontingent entitlement amounts differ from the amounts determined usingAbrahamsons' parameters), and results in an implicit contract bid priceof A$ 51,920, the same as Abbotts & Taylor's desired investment amount,which Carpenters Inc's parameters calculate will yield them a desiredbase margin on the contract of A$ 5,610.

Again, an ordering party and each potential counterparty couldpotentially contract with each other on the basis of multiple sets ofcontingent entitlement amounts. For simplicity of explanation, Example Iassumes that only four feasible sets of contingent entitlement amountsare available as the basis of a potential contract between CarpentersInc and Abbotts & Taylor. They are the following:

1. A capped, downward sloping (45-degree) potential entitlement payout,embodied by FIGS. 14A and 14B. Note that in this and subsequent chartsthe potential entitlement payout is recognised by the potentialcounter-party Carpenters Inc as the (negative) mirror image of the(positive) entitlement payout that the ordering party Abbott & Taylorwould receive.

2. A second capped, downward sloping (45-degree) potential entitlementpayout embodied by FIGS. 15A and 15B.

3. A capped perpendicular (90-degree) potential entitlement payoutembodied by FIGS. 16A and 16B.

4. A second capped, perpendicular (90-degree) potential entitlementpayout embodied by FIGS. 17A and 17B.

In all four feasible sets, the minimum entitlement amount for Abbott &Taylor (the ordering party) is A$ 37,440. This amount represents 72percent of Abbott & Taylor's investment, the amount it specified as theminimum entitlement it was prepared to accept for the contract. This wasspecified by Abbotts & Taylor in terms of an investment loss limit of 28percent (FIG. 8).

FIGS. 18A and 18B shows in summary form all four feasible sets ofcontingent entitlement payouts to Abbotts & Taylor, from CarpentersInc's perspective. The system produced these potential contracts betweenCarpenters Inc and Abbotts & Taylor in the following manner. First, thesystem successively combines on a trial basis all possible combinationsof entitlement attributes, namely “height” and “depth” of entitlementamounts and contingent payout range of feasible product definitionvalues or “x-axis values”, to reach a counter-party bid price for eachcombination. Simultaneously, all combinations that do not produce a bidprice equivalent to the ordering party's specified investment amount (inthis case A$ 51,920) are rejected.

Looking at the sixth step in the timeline, Order Matching, and at FIGS.19A and 19B, it can be seen that the system 20 assesses the expectedreturn of the eight contingent entitlement payout bids from Abrahamsonsand Carpenters Inc. This is performed by applying each of the derivedcounterparty templates to Abbotts & Taylor's assessed probabilities ofoccurrence for each outcome. Each probability is multiplied by theelemental entitlement, and the products summed to give an impliedentitlement, described as the “Expected Return Present Value” in FIGS.19A and 19B. The implied entitlement then is subtracted from theinvestment amount to give the “net return”. From Abbotts & Taylor'sperspective, the bid of Abrahamsons termed Offer No. 4 (A$ 57,312) is asuperior offering to all other bids, yielding Abbotts & Taylor a netreturn on investment of A$ 5,392. This leads to a formal matching ofAbbotts & Taylor's order by Abrahamsons at 95.01.01.17.38.07.00,involving Abbotts & Taylor's original specified investment considerationamount of A$ 51,920.

Before the matching formally occurs, a check is made that absolute loss,expected loss, expected value and portfolio attribute limits are notviolated.

The seventh step in the timeline, Order/Contract Confirmation (which isnot illustrated in detail in the charts) can be seen to take place fiveseconds later at 95.01.01.17.38.11.00, after the system has determinedthat Abbotts & Taylor is able to (and then does) immediately pay itsdesired investment (consideration) amount of A$ 51,920 to Abrahamsons.

The remaining steps shown in the timeline of FIG. 3, including contractmaturity and settlement, are not described, rather are incorporatedherein by cross-reference to International Publication No. WO 94/28496(PCT/AU93/00250).

EXAMPLE II

This example of an investment contract is an extension of Example I.More particularly, however, it is a special case of the general case ofExample I, in that, for any particular phenomenon, the system 20 isconstrained to price a contract utilising one entitlement shapepossibility only. Specifically, this shape is a straight line withrespect to the “outcome” axis. Put another way, the gradient of thegraph of entitlement (y-axis) against outcome (x-axis) is zero.

This case can be thought of as the situation where the ordering partyhas no direct interest in the value of the particular phenomenon atcontract maturity date. Rather, the ordering party seeks an entitlementthat is independent of this outcome. The investment contract, from theordering party's view, is in the nature of a loan, in that a specifiedconsideration will be made available to a contracting counterparty asthe means of gaining a yet-to-be-determined future entitlement amount.This amount is not contingent on the outcome of the product phenomenonat contract maturity.

The example shows just this situation, in that one party (such as aninstitutional fund manager) seeks to gain from possession of a definedresource (say, Australian dollars) by becoming a party to a contractwith another, as yet unknown, party (such as another fund manager)seeking to gain from making that defined resource available, the gainconsisting of an entitlement payout in the future. In the example, theparty seeking to gain from making the resource available is the orderingparty to the investment contract, and the parties seeking to havepossession of the defined resource are the counterparties to thecontract.

The specific contract proposal is one which will provide an orderingparty, upon payment of its nominated consideration to a matchedcounterparty, with a yet-to-be-determined entitlement (in Australiandollars) from the counterparty on contract maturity. The entitlementamount is a variable to be determined by the system 20 through pricingand matching an ordering party's input data with one or morecounterparties' input data. That is, the system determines the“location” of the straight line shape with respect to the entitlementaxis (y-axis) to enable matching of a contract that is worthwhile toboth the ordering party and potential counterparty, subject to limitsset by both parties.

The yet-to-be-determined entitlement is not contingent on the outcome ofthe particular phenomenon on which the contract is based. The amountwill thus be essentially a function of a counterparty's “effectivediscount rate”, determined by three parameters:

1. The discount (time of maturity to present day interest) ratespecified by a counterparty for the contract;

2. The commission rate specified by a counterparty for the contract; and

3. The difference (positive or negative) between the sum of thecounterparty's component product prices and unity.

Note that if, say, the sought-after contract entitlement denominationwere US dollars, the matter of the counterparty's defined forwardAustralian dollar/US dollar exchange rate would also be relevant to thedetermination of the effective discount rate.

As noted, the relevant key stakeholders are the same as in Example I: anapplication promoter (BLC Inc); various product sponsors (the relevantone for the example being BLC Inc itself); various product orderingparties (the relevant one for the example being Abbotts & Taylor);various potential counterparties (the relevant ones for the examplebeing Abrahamsons and Carpenters Inc): a counterparty guarantor (CNZBanking Corporation); and an application regulator (Pacific CentralBank).

A timeline depicting the steps in the contract from the first step,Application Specification, to the final step, Contract Settlement, isshown in FIG. 4 and further supported by FIGS. 20 to 27B.

Looking at the first step in the timeline, Application Specification, inconjunction with FIG. 20, we see that BLC Inc established a Contract APP(Application ID 001) on 91.06.03.17.00.00 (that is, at 5 pm on Jun. 3,1991) to deal with investment. The application involves a pricing andmatching objective function of: “maximise pre-tax expected return onconsideration investment”. As a system instruction this means: identifya counterparty (or counterparties) who have defined pricing parametersand contract, product and portfolio limits which, when combined with theordering party's specified consideration, will yield an entitlementpayout that is not contingent on the outcome of the product phenomenonand maximises the ordering party's pre-tax expected return oninvestment, subject to whatever match constraints the ordering partyand/or counterparty have specified. Application ID 001 supports a rangeof products.

Looking at the second step in the timeline, Product Specification, inconjunction with FIG. 21, we see that BLC Inc was also the productsponsor of Product 10061 at the same time (91.06.03.17.00.00). Thisproduct relates to the market for stock indices. The maturity date forProduct 10061 is 96.06.03.17.00.00.00. The submarket is the PTSE 75stock index. The consideration for a specific contract involving Product10061 is in the form of money (commercial bank deposits denominated inAustralian dollars). The entitlement payout is also in the form ofcommercial bank deposits denominated in Australian dollars, payable, ifnecessary, after the product's specified maturity date/time.

Looking at the third step in the timeline, Potential CounterpartyProduct Pricing Specifications, one finds two entities, Abrahamsons andCarpenters Inc, acting as potential counterparties for forthcomingprimary product orders for Product 10061. At this point in the timeline(95.01.01.17.00.00.00), 43 months after the specification of Product10061, both Abrahamsons and Carpenters Inc have current specifiedparameters for pricing potential forthcoming orders for the product.

Looking at the fourth step in the timeline, Primary Order Specification,in conjunction with FIG. 22, it can be seen that an ordering party,Abbotts & Taylor, is seeking a contract from an offering party inProduct 10061 at that time (95.01.01.17.37.06.00). FIG. 22 shows theparameters that Abbotts & Taylor has specified for the contract it isseeking at this time, including a desired investment consideration of A$51,920. For this investment, Abbotts & Taylor has specified a minimumpresent value expected return of A$ 54,000 based on a discount rate of11 percent per annum. In the specification, Abbotts & Taylor hasconstrained the system's determination of possible payout shapes to onegeneral class of payout shape, namely, a straight line, where thegradient of the graph of entitlement (y-axis) against outcome (x-axis)is zero.

Looking at the fifth step in the timeline, Order Specification Pricing,in conjunction with FIGS. 25A, 25B, and 26, it can be seen (FIGS. 25Aand 25B) that the potential counterparty Abrahamsons providedregistering data in the form of assessed probabilities of occurrence, adiscount rate from the time of maturity to the present day, a flatcommission rate and a maximum negative entitlement amount. Abrahamsons'pricing parameters indicate its appropriate defined circumstances ID foran ordering party such as Abbotts & Taylor is 26, which implies acommission rate of 1.25 percent, a discount rate of 10 percent perannum, a particular set of component product prices (as shown) and aparticular set of assessed probabilities of occurrence (as shown). Thesystem 20 determines, for Abrahamsons, a feasible set of equal netentitlement amounts that represent both Abrahamsons' best possible bidand a possibility for Abbotts & Taylor given their specified parameters.The calculated entitlement matching the consideration is $57,280. Theform of the calculation is included in FIGS. 23A and 23B and results inan implicit contract bid price of A$51,920, the same as Abbotts &Taylor's desired investment amount, which Abrahamsons' parameterscalculate will yield it a desired base margin on the contract ofA$2.019. This determination occurs at 95.01.01.17.38.02.00.

FIG. 24 shows the feasible set of equal contingent entitlement payoutsto Abbotts & Taylor, from Abrahamsons'perspective, in graphical form.The system 20 generated this potential contract between Abrahamsons andAbbotts & Taylor in the following manner. First, the system successivelytrialed individually all possible entitlement amounts to reach acounterparty bid price equal to the ordering party's consideration(investment). Simultaneously, all amounts that did not produce a bidprice equal to the ordering party's specified investment amount (in thiscase A$51,920) were rejected. As in Example 1, these results could bereached by various sophisticated heuristic and operations research basedmethods as well as by the simple trial-and-error search processdescribed here.

Still looking at the fifth step in the timeline, Order SpecificationPricing, in conjunction with FIGS. 25A, 25B, and 26, it can be seen(FIGS. 25A and 25B) that the potential counterparty Carpenters Incprovided registering data in the form of assessed probabilities ofoccurrence, a discount rate from the time of maturity to the presentday, a flat commission rate and a maximum negative entitlement amount.Carpenters Inc's pricing parameters indicate its appropriate definedcircumstances ID for an ordering party such as Abbotts & Taylor is 17,which implies a commission rate of 1.30 percent, a discount rate of 9.8percent per annum, a particular set of component product prices (asshown) and a particular set of assessed probabilities of occurrence (asshown). The system 20 determines, for Carpenters Inc. a feasible set ofequal net entitlement amounts that represent both Carpenters Inc bestpossible bid and a possibility for Abbotts & Taylor given theirspecified parameters. The calculated entitlement matching theconsideration is A$57,860 (note that this entitlement amount differsfrom the amount determined by the system 20 using Abrahamsons'parameters). The form of the calculation is included in FIGS. 25A and25B and results in an implicit contract bid price of A$51,920, the sameas Abbotts & Taylor's desired investment amount which Carpenters Inc'sparameters calculate will yield it a desired base margin on the contractof A$1,550. This determination occurs at 95.01.01.17.38.02.00.

FIG. 26 shows the feasible set of equal contingent entitlement payoutsto Abbotts & Taylor, from Carpenters Inc's perspective, in graphicalform. The system 20 generated this potential contract between CarpentersInc and Abbott & Taylor in the following manner. First, the systemsuccessively trialed individually all possible entitlement amounts toreach a counterparty bid price. Simultaneously, all amounts that did notproduce a bid price equal to the ordering party's specified investmentamount (in this case A$51,920) were rejected. These results could bereached by various sophisticated heuristic and operations research basedmethods as well as by the simple trial-and-error search processdescribed here.

Looking at the sixth step in the timeline, Primary Order Matching (FIGS.27A and 27B), it can be seen that the system 20 assessed the expectedreturn to Abbotts & Taylor on the two entitlement payout bids fromAbrahamsons and Carpenters Inc, respectively. Abrahamson's bid ofA$57,280 yields an expected return to Abbotts & Taylor of A$42,730 andCarpenters Inc's bid of A$57,860 yields an expected return of A$43,164.Both amounts are below Abbotts & Taylor's specified minimum expectedreturn of A$54,000. In addition, both bids would result in a negativenet return on investment to Abbotts & Taylor of (A$9,190) and (A$8,756)respectively. Therefore the order matching fails.

Since the transaction does not proceed, the steps of ContractConfirmation, Contract Maturity and Contract Settlement, as shown in thetimeline, do not occur in relation to Abbotts & Taylor's orderspecification.

EXAMPLE III

This further example of an investment contract is a variation of ExampleII and describes the formulation of a contract where an ordering partyseeks to gain an entitlement in a denominated resource (in this casecommercial bank US dollars) from another, as yet unknown, party inexchange for a consideration in a differently denominated resource (inthis case commercial bank Australian dollars).

The example is a special case of the general case of Example II in thatthe ordering party has no direct interest, at contract maturity date, inthe value of the product phenomenon on which the contract is based.Rather, the ordering party seeks an entitlement that is independent ofthis outcome.

Unlike Example II, however, the investment contract is in the nature ofan exchange, in that a specified consideration in one denomination willbe made available to a contracting counterparty as the means on gaininga yet-to-be determined future entitlement amount in a differentdenomination. This amount is not contingent on the outcome of theproduct phenomenon at the time that the contract matures.

The example also involves a unique notion of contract maturity. In thecase of Examples I and II, all contracts in the specified productphenomenon mature at the same time. In this example, however, eachcontract in the product phenomenon matures at the precise moment in timethat the contract is matched, that is, at the earliest point in timethat the ordering party's contract specification is matched by thesystem 20 with a counterparty bid. Put another way, contract maturity issimultaneous with order matching, not with a specified future date forall contracts related to the product phenomenon in question. Thereforethe product phenomenon could be said to have a continuum of maturitydates made up of all the points in time that contracts are matched. Inthis way the product could be described as maturing each time a contractis matched.

In the example, the investment contract offering is one where anordering party specifies to the system 20 that it is prepared toexchange a consideration of A$102,900 for a yet-to-be-determinedentitlement in US dollars of not less than US$70,000.

The relevant key stakeholders are the same as in Example II: anapplication promoter (BLC Inc); various product sponsors (the relevantone for the example being BLC Inc itself); various product orderingparties (the relevant one for the example being Abbotts & Taylor),various potential counterparties (the relevant ones for the examplebeing Abrahamsons and Carpenters Inc); a counterparty guarantor (CNZBanking Corporation); and an application regulator (Pacific CentralBank).

A timeline depicting the steps in the contract from the first step,Application Specification, to the final step, Contract Settlement, isshown in FIG. 5 and further supported by FIGS. 28-32B.

Looking at the first step in the timeline, Application Specification, inconjunction with FIG. 28, we see that BLC Inc established a Contract APP(Application ID 201) on 91.06.03.17.00.00 (that is, at 5 pm on Jun. 3,1991) to deal with investment. The application involves a pricing andmatching objective function of: “maximise pre-tax expected return onconsideration/entitlement investment”. Application ID 201 supports arange of products.

Looking at the second step in the timeline, Product Specification, inconjunction with FIG. 29, we see that BLC Inc was also the productsponsor of Product 11099 at the same time (91.06.03.17.00.00). Thisproduct relates to the market of immediate exchange. The maturity datefor contracts in Product 11099 is “simultaneous with contract matching”.The consideration for a specific contract involving Product 11099 is inthe form of money (commercial bank deposits denominated in Australiandollars). The entitlement payout is in the form of commercial bankdeposits denominated in US dollars, payable immediately at contractmatching; that is, the product matures on contract matching.

Looking at the third step in the timeline, Potential CounterpartyProduct Pricing Specifications, two entities, Abrahamsons and CarpentersInc, are potential counterparties for forthcoming primary product ordersdealing with Product 11099. At this point in the timeline(92.06.03.15.00.00.00), 12 months after the specification of Product11099, both Abrahamsons and Carpenters Inc have current specifiedparameters for pricing potential forthcoming orders for the product.

Looking at the fourth step in the timeline, Primary Order Specification,in conjunction with FIG. 30, it can be seen that an ordering party,Abbotts & Taylor, is seeking a contract from an offering party inProduct 11099 at that time (92.06.03.17.00.00.00). FIG. 30 shows theparameters that Abbotts & Taylor has specified for the contract it isseeking at this time, namely a desired investment consideration ofA$102,900 to be exchanged as soon as possible for an entitlement amountof no less than US$70,000.

As can be seen in FIGS. 31A and 31B, because contract maturity issimultaneous with contract matching, there are no feasible productdefinition values (that is, possible contingent outcomes for the PTSE 75phenomenon). Abrahamsons therefore submits only anentitlement/consideration exchange rate and a per annum commission rate.The component product values are, by definition, unity.

Looking at the fifth step in the timeline, Order Specification Pricing,in conjunction with FIGS. 31A and 31B, it can be seen that the system 20determines that the entitlement amount that the potential counterpartyAbrahamsons judges to be ideal given its specified parameters isUS$84,000. This determination occurs at 92.06.03.17.38.02.00.Abrahamsons' pricing parameters specify an exchange rate of 1.210, acommission rate of 1.25 percent and a single assessed probability of one(1) (discount (interest) rate and component product prices beingirrelevant in this case). Abrahamsons' entitlement bid of US$84,000 istherefore above Abbotts & Taylor's specified minimum entitlement amountof US$70,000.

Still looking at the fifth step in the timeline, Order SpecificationPricing, in conjunction with FIGS. 32A and 32B, it can be seen that thesystem 20 determines that the entitlement amount that the potentialcounterparty Carpenters Inc judges to be ideal given its specifiedparameters is US$82,000. This determination occurs at92.06.03.17.38.02.00. Carpenters Inc's pricing parameters specify anexchange rate of 1.239, a commission rate of 1.30 percent and a singleassessed probability of one (1) (discount (interest) rate and componentproduct prices again being irrelevant in this case). Abrahamsons'entitlement bid of US$82,000 is therefore also above Abbotts & Taylor'sspecified minimum entitlement amount of US$70,000.

Looking at the sixth step in the timeline, Primary Order Matching, itcan be seen that the system 20 assessed Abrahamsons' bid to be superiorto that of Carpenters Inc and above Abbotts & Taylor's specified minimumentitlement amount. This led to a formal matching and confirmation ofAbbotts & Taylor's order by Abrahamsons at 92.06.03.17.38.12.00.Contract order matching and confirmation is contemporaneous withcontract maturity, which can be seen in the seventh step in the timelineto occur four seconds later at 92.06.03.17.38.12.04, at which time theexchange of Abbotts & Taylor's consideration of A$102,900 forAbrahamsons' entitlement of US$84,000 takes place.

The seventh and final step in the timeline, Contract Settlement, iscompleted six seconds later at 92.06.03.38.18.00.00.

Delay of Formal Order Matching

A further embodiment, relevant to each of the embodiments of Examples Ito III above, involves the order pricing and matching procedures asbefore. There then follows an additional step, before formal matchingand confirmation occurs, of introducing a period of time during whichthe ordering party and counterparty can seek further contracts in thesame or other applications and products. This step enables orderingparties and counterparties to take steps to manage the financialconsequences of the new contract on their portfolio. The period ofobligation can be specified by the promoter stakeholder, and thus beknown to the ordering party and the registering counterparties.

Pricing Only

As a further embodiment, it is possible for any ordering party to make a‘pricing only’ enquiry of the system 20 in relation to potential, butunmatched, investment contracts. The system treats the enquiry as anormal contact request, however after deriving the one or more impliedentitlements from the set of templates arrived at, does not perform thefinal steps of comparing the implied entitlements against the investmentamount (consideration). In this way potential counterparties can gainmarket knowledge without committing themselves to a contractualobligation.

Pricing After Match

A further extension of the pricing enquiry is to permit matchedcontracts to be repriced during the period between match and maturity.This is performed by the party who acted as the ordering party to thecontract in question to gain market knowledge of performance of theinvestment against a different (current) pool of counterparties. Thatis, the pricing is performed on the basis of the original investmentamount but against the contemporaneous counterparty data, which isalmost certain to be different from that at the time the contract wasoriginally priced and matched. Indeed, even only a subset of thecontemporaneous counterparty data may be specified or utilised in therepricing.

Such repricing can be a valuable tool to the original investing orderingparty, as it may prompt other investments, or the submission ofregistering data whereby the party concerned acts rather as acounterparty.

Multiple Component Counterparties

In the Examples given above, the ordering party's investment amount ispriced for its whole amount against each counterparty's registeringdata. It is equally possible for the consideration to be divided intointeger components, and each integer component treated as a separatepricing and matching task. The matched contract then is constructed asthe summed combination of all the matched components.

What is claimed is:
 1. A data processing system to enable theformulation of a multi-party investment contract, the system comprising:input means by which an ordering party can input contract data relatingto at least one phenomenon, each said phenomenon having a range offuture outcomes and a future time of maturity, said contract dataincluding a view as to each outcome in said range and a considerationdue to a counterparty at or after a time of matching, and further bywhich at least one counterparty can input registering data including aview as to each outcome in said range; and data processing meansoperable to price and match a contract for said phenomenon from saidcontract data and said registering data, the pricing including: applyingat least one template of entitlement as a function of outcome to eachcounterparty's view to give one or more individual counterparty priceseach equal to said consideration; and applying said ordering party viewto each said template of entitlement to derive one or more impliedentitlement valuations; the matching including: determining whichcounterparty will provide the best entitlement on maturity by comparingeach implied entitlement valuation with said consideration; and matchingthe contract with that counterparty having a template of entitlement forthe best said comparison.
 2. A method for the formulation of amulti-party investment contract, the method comprising the steps of:inputting ordering party contract data relating to at least onephenomenon, each said phenomenon having a range of future outcomes and afuture time of maturity, said contract data including a view as to eachoutcome in said range and a consideration due to a counterparty at orafter the time of matching; inputting counterparty registering dataincluding a view as to each outcome in said range; and pricing andmatching a contract for said phenomenon from said contract data and saidregistering data, said step of pricing, for each counterparty,including: applying at least one template of entitlement as a functionof outcome to said counterparty views to give one or more individualcounterparty prices; applying said ordering party view to each templateof entitlement to derive at least one implied entitlement valuation; andsaid step of matching including: determining which counterparty willprovide the best entitlement on maturity by comparing said at least oneimplied entitlement valuation with the consideration; and matching thecontract with said counterparty having a template of entitlement for thebest said comparison.
 3. A data processing system to enable theformulation of a multi-party investment contract, the system comprising:input means by which an ordering party can input contract data relatingto at least one phenomenon, each said phenomenon having a range offuture outcomes and a future time of maturity, said contract dataincluding a set of probabilities of occurrence for each outcome in saidrange, and further by which at least one counterparty can inputregistering data including a set of probabilities of occurrence for eachoutcome in said range; and data processing means operable to price andmatch a contract for said phenomenon from said contract data and saidregistering data, the pricing including: applying at least one templateof entitlement as a function of outcome to give one or more individualcounterparty prices each equal to said ordering party's consideration;and applying said set of probabilities associated with said orderingparty to each said template of entitlement to derive an impliedentitlement valuation; the matching including: determining whichcounterparty will provide the best entitlement on maturity from saidimplied entitlement valuation; and matching said contract with thatcounterparty having a template of entitlement for the best saidvaluation.
 4. A method for the formulation of a multi-party investmentcontract, the method comprising the steps of; inputting ordering partycontract data relating to at least one phenomenon, each said phenomenonhaving a range of future outcomes and a future time of maturity, saidcontract data including a set of probabilities of occurrence for eachoutcome in said range; inputting counterparty registering data includinga set of probabilities of occurrence for each outcome in said range; andpricing and matching a contract for a said phenomenon from said contractdata and said registering data, said step of pricing, for eachcounterparty, including: applying at least one template of entitlementas a function of outcome to said set of probabilities associated withsaid counterparty to give one or more individual counterparty prices;and applying said set of probabilities associated with said orderingparty to each individual counterparty template of entitlement to deriveat least one implied entitlement valuation; said step of matchingincluding: determining which counterparty will provide the bestentitlement on maturity from said at least one implied entitlementvaluation relative to a given consideration; and matching said contractwith said counterparty having a template of entitlement for the bestsaid valuation.
 5. A data processing system to enable the formulation ofa multi-party investment contract, the system comprising: input means bywhich an ordering party can input contract data relating to at least onephenomenon, each said phenomenon having a range of future outcomes and afuture time of maturity, said contract data including a set ofprobabilities of occurrence for each outcome in said range and aconsideration due to a counterparty at or after the time of matching,and further by which at least one counterparty can input registeringdata including a set of probabilities of occurrence for each outcome insaid range; and data processing means operable to price and match acontract for said phenomenon from said contract data and saidregistering data, the pricing including: applying at least one templateof entitlement as a function of outcome over portions of said range offuture outcomes to each counterparty's set of probabilities to give oneor more individual partial counterparty prices; and applying saidordering party set of probabilities to each said template of entitlementto derive at least two partial implied entitlement valuations; thematching including: determining which two or more counterparties willprovide the best entitlement on maturity by comparing a set of said atleast two partial implied entitlement valuations with saidconsideration; and matching said contract with that counterparty havinga template of entitlement for the best said comparison.
 6. A method forthe formulation of multi-party investment contracts, the methodcomprising the steps of: inputting ordering party contract data relatingto at least one phenomenon, each said phenomenon having a range offuture outcomes and a future time of maturity, said contract dataincluding a set of probabilities of occurrence for each outcome in saidrange and a consideration due to a counterparty at or after the time ofmatching; inputting counterparty registering data including a set ofprobabilities of occurrence for each outcome in said range; and pricingand matching a contract for a said phenomenon from said contract dataand said registering data, said step of pricing, for each counterparty,including: applying at least one template of entitlement as a functionof outcome over portions of said range of future outcomes to said set ofprobabilities associated with said counterparty to give one or moreindividual partial counterparty prices; and applying said set ofprobabilities associated with said ordering party to each individualcounterparty template of entitlement to derive a partial impliedentitlement valuation; said step of matching including: determiningwhich two or more counterparties will provide the best entitlement onmaturity by comparing a set of partial implied entitlement valuationswith said consideration; and matching the contract with saidcounterparty having a template of entitlement for the best saidcomparison.